IRAQ OFFERS TO RELINQUISH KUWAIT, BUT BUSH CALLS PLAN A CRUEL HOAX

Iraq offered Friday for the first time to comply with U.N. demands that it relinquish Kuwait, raising hopes for an end to the Persian Gulf War. But President Bush said conditions Iraq attached made it nothing more than a "cruel hoax."

"There is nothing new here," a grim-faced Bush said of the Iraqi offer, adding that other coalition members shared that assessment. He urged the Iraqi military and people to rise up against Saddam Hussein."We thought we had a shot for peace; that is not the case," Bush said.

As he spoke, the war pressed on. Allied bombers continued their onslaught, methodically working to isolate Iraqi forces in the Kuwait theater by destroying bridges, roads and supply lines, the U.S. military said Friday.

In making the offer, the Baghdad government said any withdrawal of its forces should be tied to an Israeli pullout from the occupied lands.

Throughout the crisis, the United States has steadfastly rejected any linkage of the gulf crisis and the Israeli-Palestinian conflict.

The Iraqi proposal contained an array of conditions.

It said its withdrawal was conditioned on a pullout from the region of allied forces - including arms sent to Israel after war broke out - with the pullouts to be completed within one month of a comprehensive cease-fire.

The Baghdad communique demanded that the allies immediately cease land, sea and air operations against Iraq and that the U.N. Security Council repeal a dozen resolutions aimed at forcing it out of Kuwait.

Iraq said a future political arrangement in Kuwaitshould be based on "the wishes of the people" and not Kuwait's ruling family. The allies have demanded the restoration of Kuwait's former rulers.

The Baghdad government also insisted that countries participating in the war or financing the military effort against Iraq "rebuild what the aggression has destroyed."

Markets ebb and flow

Iraq's announcement sent rapid shock waves through world financial markets, which have ridden a roller coaster throughout the crisis. Oil prices fell more than $2 a barrel in London immediately following the Iraqi announcement but later bounced back as investors awaited more news.

As the weight of the conditions sank in, hopes raised by the offer were dashed. Shortly after the announcement, White House spokesman Marlin Fitzwater said, "The more we look at it, the worse it gets."

Later, he added: "It is a real disappointment on our part that he (Saddam) is again trying to raise the hopes of his own people and others around the world, with no willingness to back it up."

Saddam weakening, Israel says

Israeli Defense Minister Moshe Arens said Friday the offer was a sign that Saddam's military resolve was weakening.

"I think this is the first indication that Saddam Hussein is beginning to understand that he is in bad shape," Arens told Israeli Television.

In Saudi Arabia - the main staging ground for the huge allied deployment that began as Operation Desert Shield and turned to Operation Desert Storm at the start of the war - there was no immediate official reaction. "It is deeds not words that count," one Saudi official said.

In Baghdad, hammered by a month of allied bombing, residents fired guns into the air in celebration after hearing of the possible settlement.

In one poor neighborhood where a dozen shops had been wrecked by allied bombs, smiling residents gathered spontaneously in the street. "The war is over," said one.

U.N. chief remains hopeful

The U.N. Security Council was expected to discuss the Iraqi offer in closed session Friday afternoon. Secretary-General Javier Perez de Cuellar said Iraq's offer "deserves careful consideration," but he declined further comment until he could study it.

The Iraqi move came amid a rush toward what was expected to be an epic land clash between the allied and Iraqi armies arrayed in southern Iraq, Kuwait and northern Saudi Arabia. Some commanders have suggested the battle could begin in a matter of weeks.

Iraq, which had mounted virtually no defense to the allied air onslaught, had expressed eagerness for the ground confrontation. The allies indicated they expected to prevail but agreed that the land clash would be a costly and bloody one.

In the month of warfare, allied aircraft attacked at the rate of a mission a minute, pounding Iraqi troops and wrecking the infrastructure that supported Saddam's military machine.

Soviets, Iranians study offer

Both the Soviet Union and Iran, which have been trying to promote peace proposals, welcomed the Iraqi announcement, although officials said they wanted more time to study the proposals.

In Tehran, an Iranian Foreign Ministry official said the Iraqi proposal was "a step toward peace," the official Islamic Republic News Agency reported.

Kuwait's U.N. ambassador Mohammad Abulhassan responded coolly.

"It is conditioned, it is just a proposal," he said after conferring with the Kuwaiti government-in-exile.

The Iraqi statement, carried on Baghdad Radio and released by the official Iraqi News Agency, said the council's agreement "should be regarded as a guarantee from Iraq and coupled with an immediate and comprehensive cessation of all land, air and sea military operations."

"In order to achieve a dignified and acceptable political settlement, the Revolutionary Command Council has decided to accept U.N. Security Council resolution 660 of 1990, including the clause related to Iraqi withdrawal," the Iraqi text said.

Resolution 660 was the first in a series of U.N. resolutions passed after Iraq's invasion of Kuwait, calling for an unconditional Iraqi withdrawal from the emirate and urged the two countries to discuss their differences through negotiations.